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Your Tax Refund May be Smaller Next Year. Here's Why

These 10 tax changes may significantly impact the size of your refund.

One hundred dollar bills laid out in a diagonal pattern
Many pandemic-era tax benefits have ended, which means tax refunds could be smaller in 2023.
Cimmerian/Getty

With 2023 quickly approaching, now's a great time to get a head start on tax season. Although you can't officially file your federal tax returns until the last week in January, getting organized can help streamline the tax filing process.

Plus, there were a lot of tax changes in 2022 that are likely to change the amount of your tax refund. 

Many of the pandemic tax benefits from the past few years, like the expanded child tax credit, child and dependent care credit and stimulus payments ended at the end of 2021, which could mean your refund will be a little smaller this year. And, if you started a side hustle or freelance gig, you may find you owe taxes this year.

When it comes to taxes, 2022 is the year of the great reset, said Mark Steber, chief tax information officer for Jackson Hewitt. "A lot of things that were put into place for 2021, and some part 2020, will revert back to pre-pandemic years, which can lead to refund shock or, more importantly, balance-due shock."

In addition, some new regulations were put into place. Third-party payment apps like PayPal, CashApp and Venmo will now be reporting money earned by freelancers throughout the year to the IRS. Student loan forgiveness -- if passed -- is exempt from federal taxation, but borrowers in some states may owe taxes. And lastly, if you had any crypto activity in the past year, the IRS wants to know about it.

There's a lot to cover, so we'll walk you through the most significant tax changes to prepare for this upcoming tax season.

1. The standard deduction for 2022 is higher

It's typical for the standard deduction to increase a little each year, along with the rate of inflation. For your 2022 tax return, the standard deduction for single tax filers has been increased to $12,950 (up by $400), and has been bumped to $25,900 for those married filing jointly (up by $800).

The standard deduction is what most taxpayers with simple tax returns claim to reduce their taxable income. If you receive a traditional paycheck through an employer and aren't eligible for many special deductions or credits, the standard deduction likely makes sense for you. If you have expenses or individual deductions you'd rather claim, like self-employment tax breaks, you would not claim the standard deduction.

2. Income tax brackets are also higher in 2022

For 2022, income tax brackets were also raised to account for inflation. Your income bracket refers to how much tax you owe based on your adjusted gross income, which is the money you make before taxes are taken out, excluding itemized exemptions and tax deductions.

While the changes were slight, if you were at the bottom of a higher tax bracket in 2021, you may have bumped down to a lower rate for your 2022 tax return.

2022 tax brackets for single filers

Taxable income Federal tax rate
$10,275 or less 10%
$10,276 - $41,775 $1,027.50 plus 12% of income over $10,275
$41,776 - $89,075 $4,807.50 plus 22% of income over $41,775
$89,076 - $170,050 $15,213.50 plus 24% of income over $89,075
$170,051 - $215,950 $34,647.50 plus 32% of income over $170,050
$215,951 - $539,900 $49,335.50 plus 35% of income over $215,950
$539,901 or more $162,718 plus 37% of income over $539,900

2022 tax brackets for taxpayers who are married, filing jointly

Taxable income Federal tax rate
$20,550 or less 10%
$20,551 - $83,550 $2,055 plus 12% of income over $20,550
$83,551 - $178,150 $9,615 plus 22% of income over $83,550
$178,151 - $340,100 $30,427 plus 24% of income over $178,150
$340,101 - $431,900 $69,295 plus 32% of income over $340,100
$431,901 - $647,850 $98,671 plus 35% of income over $431,900
$647,851 or more $174,253.50 plus 37% of income over $647,850

3. The child tax credit benefits has returned to normal

While 2021 had a temporary expansion of the child tax credit, including eligibility for more dependent children and offering advance payments, that isn't the case for your 2022 taxes.

The CTC has dropped back down to its pre-pandemic amount -- $2,000 per child or dependent -- and is now only available for children under 17 years of age. The credit, which was fully refundable last year, is now only partially refundable to some lower-income parents, and advance payments are no longer in effect. (Partially refundable means you can only receive a portion of this credit as a refund, though the full amount can be applied to your tax bill.)

That said, you should still claim the CTC in 2022 if eligible -- it can help boost your refund or may help offset a tax bill. And, while federal benefits have decreased, some states are offering child tax credit benefits this year and next. 

4. Fewer filers will qualify for the Child Care and Dependent Tax credit

In 2021, the Child Care and Dependent Tax Credit also received temporary expansions, allowing those who made $125,000 or less to deduct between 20% to 50% of $4,000 (or $8,000 for parents with more than one child) in qualifying child care expenses. It was also refundable.

For 2022, this tax break has also reverted back to what it was in 2020. Now, parents with one child can only claim up to 35% of a maximum of $3,000 in qualifying expenses, for a maximum amount of $1,050. Parents with more than one child are eligible for up 35% of up to $6,000 in qualifying expenses, for a maximum amount of $2,100.

The biggest difference is the income qualification. To receive this credit in full in 2022, you must have made $15,000 or less -- a steep drop from 2021's $125,000 income threshold -- though households earning up to $438,000 will receive at least partial credit.

5. If you don't have kids, it's harder to qualify for the Earned Income Tax credit this year

Last year, more Americans were eligible to claim the Earned Income Tax Credit on their 2021 tax returns. This year, the EITC jumps back to its pre-pandemic rules.

For your 2022 tax return, the maximum you can claim for the EITC if you do not have kids or dependents is $560, a $942 decrease from last year's maximum of $1,502. The age requirements have also shifted back to the original rules -- you must be between 25 and 65 to qualify.

However, the income requirements for the EITC and maximum credits for those with children have increased slightly due to inflation. The 2022 income thresholds and maximum credit information are below: 

2022 EITC income thresholds (for maximum credit)

Number of dependents Filing as Single, Head of Household or Widowed Married Filing Jointly
0 $16,480 $22,610
1 $43,492 $49,622
2 $49,399 $55,529
3+ $53,057 $59,187

EITC maximum credit for 2022

Number of dependents Maximum credit in 2022 Maximum credit in 2021 Difference
0 $560 $1,502 $942 decrease
1 $3,733 $3,618 $115 increase
2 $6,164 $5,980 $184 increase
3 or more $6,935 $6,728 $207 increase

6. If your student loans were forgiven, you may owe state taxes

Though widespread federal student loan relief remains on hold, you may have received student loan forgiveness through the Public Service Loan Forgiveness program or another similar endeavor. if you had any balances forgiven in 2022, you won't owe federal taxes on the canceled amount. That's because of a provision tucked into the 2021 American Rescue Plan, preventing forgiven post-secondary education loans from federal taxation through 2025. 

However, there are a handful of states where forgiven loan balances may be taxed. IndianaMinnesotaMississippi and North Carolina have confirmed they will tax any student loan debt relief on your 2022 taxes. A few other states may as well, though the details are still being hammered out.

And, if you live in one of the states taxing forgiven student loans, you may be on the hook for county taxes on your debt relief, as well.

7. You have to report your crypto and NFT transactions 

While not technically new, for 2022 the IRS is making a more concerted effort to track cryptocurrency sales and trades. Whenever you sell or trade your crypto or purchase an item with crypto, you trigger a taxable event. Currently, crypto is taxed like property, making it subject to short- or long-term capital gains taxes. This also means you can report any crypto losses to help offset any gains. Since 2022 saw a drastic drop in the value of cryptocurrencies like bitcoin and ethereum, if you sold or traded your crypto at a loss, you may be able to reduce your tax bill by reporting your capital loss. The same goes for NFTs. 

And though the IRS will flag any unreported crypto gains, if you don't report a loss that can lower your tax burden, the IRS won't adjust your return on your behalf. "If you leave it off, it stays off," said Steber. "Tax deductible losses from your virtual currency activity do have real consequences on your tax return, and can save you real dollars. So I always tell people, if you've got something that you don't fully understand, you certainly should seek out guidance from a trained experienced tax professional."

If you have a lot of crypto or NFT activity, we recommend talking to a tax expert. But If you'd rather handle your taxes on your own, check out our top picks for crypto tax software to make filing your taxes a little easier.

8. PayPal, Venmo and other third-party apps will report your payments to the IRS

If you've been self-employed or freelancing for a few years, you likely already know that you're required to report your freelance earnings to the IRS. This year, your earnings will be even easier for the IRS to access, since third-party payment apps are now reporting your payment activity to the IRS. 

While you'll still need to report your earnings like usual, the difference is, the IRS will be able to verify the amounts you report against the transactions the payment apps provide. So, if you're off by $100, the IRS will know.

This new regulation could help freelancers. Platforms like PayPal, Venmo, Cash App, Zelle and others will be providing users with 1099-K forms, which can make reporting your income a little easier. 

And don't worry -- the money you gifted to your kids is safe from taxes. Only earnings sent through these third-party apps are subject to taxation.

No matter how you were paid, if you had any self-employment income in 2022, Steber recommends working with a tax professional to make sure you take advantage of every eligible tax break. "Self-employed people have some of the most complex tax returns, and quite frankly, some of those lucrative tax benefits in the tax code to watch out for," he said.

9. Retirement contribution limits increased

For 2022, the individual 401(k) contribution limit increased to $20,500, a $1,000 increase from 2021. If you're over 50, you can contribute an additional $6,500. The total contribution limit, which includes your employer's contributions, is $61,000 for 2022 ($67,500 for those 50 or older). IRA contributions remained unchanged at $6,000 for the year, with a $1,000 additional catch-up contribution for those 50 or older. 

Contributions to SIMPLE IRAs were also increased in 2022, rising from $13,500 to $14,000. Those over 50 can contribute an additional $3,000.

With the end of the year fast approaching, maximize your retirement contributions before the end of December. However, if you have an IRA, you can continue contributing for tax year 2022 until April 18, 2023, next year's tax filing deadline.

More Americans may qualify for the Saver's credit this year, since the IRS increased the income thresholds for 2022. It's worth up to $1,000 for single filers ($2,000 for married, joint filers), as long as you contribute to a retirement account and meet AGI requirements. For this tax year, your AGI must not be over $34,000 for single filers and those married filing separately, $68,000 for married, joint filers and $51,000 for head-of-household filers.

10. Temporary charitable donation deductions have ended

Fewer filers may be able to claim charitable donation tax breaks for this tax year. The expanded charitable cash contribution benefits that were offered in 2020 and 2021 have ended. The temporary suspension of the 60% AGI limit in 2020 and 2021 is now back, limiting the amount you can claim in charitable contributions.  

More tax advice